I am very honored to be here this afternoon to speak with the alumni, professors and students of Brigham Young University's School of Accountancy. It has been a while since I cracked a textbook, and I understand that the accounting program here is among the best in the country, so I am hoping that there won't be any tests today.
As you all know, the Public Company Accounting Oversight Board was created by Congress through the passage of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act"). The PCAOB began operations just over ten years ago, in April 2003. I joined the Board two and one-half years ago, in February 2011, after spending over thirty years in public accounting as an auditor. I would like to tell you today about some of the PCAOB's activities, several of which may have wide-ranging effects on the audit profession and consequences to public companies.
But before I go further, I should tell you that the views I express today are my personal views and do not necessarily reflect the views of the Board, any other Board member, or the staff of the PCAOB.
Most of you know the history of the creation of the PCAOB (although the students among you were likely quite young at the time). In the late 1990's and early 2000's, companies like Enron, WorldCom, Tyco, Adelphia and Sunbeam were in the news almost daily. These companies were rising stars, much like Google, Twitter or Facebook are today. Unfortunately, the impressive financial results these companies reported, even after they were audited by a major firm, turned out to be erroneous and, in some cases, fraudulent. The need to reform aspects of management accountability, corporate governance and financial reporting practices was clear. The audit profession needed a wake-up call, and the era of self-regulation came to an end when Congress passed the Sarbanes-Oxley Act. This landmark legislation, among other things, created the PCAOB, charging it with four statutory obligations: registration, inspections, enforcement and standard setting.
The Board began to register firms just months after its establishment and commenced its first inspections shortly thereafter. Ten years later, more than 2300 firms are registered with the Board, including over 900 foreign firms from 85 jurisdictions. To date, the Board has conducted well over 2000 inspections of public company audits, including inspections in 40 jurisdictions outside the United States. After the Dodd-Frank Wall Street Reform and Consumer Protection Act gave us authority in 2010 to inspect the auditors of brokers and dealers, we commenced an interim program of broker-dealer auditor inspections, and we are currently studying that industry and our findings from the interim inspection program to determine the scope of a future permanent inspection program.
Since its inception, the Board also has issued 17 auditing standards — including, for example, standards addressing audit documentation, internal controls, audit planning, engagement quality review, risk assessment and audit committee communications — as well as two attestation standards for audits of brokers and dealers. We also have substantially amended a number of interim standards — including, for example, standards addressing communications about control deficiencies, audit reports, audit sampling, and substantive analytical procedures, among others.
The fourth prong of the PCAOB's statutory mission is enforcement of applicable federal laws, standards and rules. To date, the Board has publicly announced sanctions against 49 firms and 68 individuals, with sanctions including revocations of firm registrations, orders barring or suspending individuals from practicing before the Board, censures and, in some cases, significant monetary penalties. Our cases have involved Big Four firms as well as smaller firms and sole practitioners and have been brought against firms in the U.S. and abroad. In addition, we have matters currently under investigation and in litigation, but those remain non-public pursuant to the Sarbanes-Oxley Act.
While many of our cases to date have involved audit failures of varying degrees, the Board also has imposed sanctions for failures to cooperate with the PCAOB, including failure to produce documents and the alteration of documents in connection with inspections or investigations. And just this week, for the first time, the Board censured and imposed a $2 Million fine on a large audit firm for permitting one of its auditors, who previously had been suspended by the Board, to continue to engage in activities that were not permitted by the Board's suspension order.
That tells you a little bit about where we have been. Let me now turn to some of our current activities to give you a sense of where we are going.
One exciting new project that we began about a year ago relates to two questions that I — and others — have asked over time.
The answer to both of these questions requires us to be able understand what factors contribute to high quality audits and identify what can be measured. Our Office of Research and Analysis began tackling this question over the last year by working on identifying audit quality indicators. This project is focused, in its early stages, on defining audit quality, establishing a framework for thinking about audit quality, and developing specific, quantitative indicators that, ultimately, may be used as objective measures of audit quality. The Board and the staff of the Office of Research and Analysis have discussed this project with our Standing Advisory and Investor Advisory groups and have obtained valuable feedback. We hope to issue a concept release in the coming months to seek comment on a list of potential audit quality indicators that seem to show the most promise. Although we see this project as a marathon, rather than a sprint, it could have wide-ranging implications on many of our activities if successful. It could affect the content or focus of inspections and inspection reports, influence potential future standard-setting projects and may help firms to track their progress over time. In addition, measurable indicators of audit quality may provide important information to audit committees trying to evaluate the performance of their auditors.
Indeed, the Board considers audit committees an important complement to our audit oversight activities. Ultimately, audit committees hire and fire the auditors. While regulatory activities like inspections, enforcement and standard setting can and should drive improvements over time, audit committees — equipped with relevant information about how to evaluate the quality of work by auditors — are a powerful market force that can and should drive improvements in audit quality through market incentives. It is for that reason that the Board also has made outreach to audit committees an important priority. We are talking to audit committee members whenever we can, to determine how we can best help them enhance their oversight over audit firms.
In one effort to ensure that audit committees receive important information about the audit, the Board issued last year a new standard, AS 16, governing the required communications between auditors and audit committees. This standard is intended to improve the quality of audits by providing both auditors and audit committees with information they need to discharge their respective responsibilities. The standard is effective for the audits of 2013 financial statements, and we look forward to learning about how its implementation has been received by auditors, audit committees, issuers and others.
In addition, in August 2012, in order to help audit committees understand the context and meaning behind our inspection reports, we issued a release to provide information to audit committees about the Board's inspection process and the meaning of reported inspection results.  The objective of the release was to better equip audit committees to engage in meaningful discussion with audit firms about the process, results and context of PCAOB inspections.
In addition to providing better information to audit committees, the Board also is interested in fostering a better two-way dialog with audit committees so that we can hear more about what they do and what is important to them. We are interested in hearing from audit committees their perspectives on our standards and oversight activities intended to improve audit quality, so we have had discussions, through our Standing Advisory Group and in other forums, to understand how we can best reach audit committee members and what their interests are. We are working on changes to our website to make it easier for audit committee members to find relevant information. We have actively reached out to corporate governance organizations to increase participation by PCAOB Board members and staff in conferences and other events that are targeted toward audit committee members. We are letting audit firms know that we are interested in a dialog with their clients, such as by attending firm forums for audit committee members. It is clear that the audit committee members with whom we engage take their role seriously, and some spend significant time discharging their responsibilities. But we hear that not all audit committee members are performing at the level the Act envisioned. We also hear frequently that audit committees have many responsibilities and are among the most active Board committees. We hope that, over time, our efforts enable audit committees to raise their performance overall.
Ultimately, however, the Board's mission is the protection of investors. More specifically, the Board has been charged with the protection of "the interests of investors and . . . the public interest in the preparation of informative, accurate and independent audit reports." It is in that context that the Board recently issued a proposal of a standard that would increase the information provided by auditors in their standard reports. This proposal, if adopted, would require auditors to go beyond the current model of providing only a pass/fail opinion on whether the company's financial statements are fairly stated (or whether internal controls are effective) and would require auditors also to discuss in their reports so-called "critical audit matters" in order to provide investors and others with more insight into the audit. As defined, critical audit matters are those matters addressed during the audit that (1) involved the most difficult, subjective or complex auditor judgments; (2) posed the most difficulty to the auditor in obtaining sufficient appropriate evidence; or (3) posed the most difficulty to the auditor in forming the opinion on the financial statements.
We issued this proposal after a long period of public outreach, during which investors clearly voiced their interest in learning more from auditors about what they do and what they are learning about the company in the process. Our approach was tailored to achieve a careful balance — between satisfying the investor need for more information about the audit, while not undermining management's role in providing financial information about the company.
I see the proposed "critical audit matters" as a window into the audit, intended to provide more information about the audit process and the difficulty faced by auditors in connection with providing assurance on certain important and complex aspects of the company's financial statements or internal controls. Perhaps you can think of it as auditors telling investors what kept the auditor up at night.
It is important to understand that the proposed standard does not require reporting of all information known by the auditor in which investors may have an interest. There are risks and uncertainties inherent in the financial reporting process and in business that may not be discussed as critical audit matters because the application of the accounting standards are clear, and the audit process is relatively straightforward. Likewise, there may be critical audit matters reported that bear little on investment decisions. But, overall, I believe that the proposed enhanced reporting will add helpful context to the mix of information available to investors.
This standard, clearly, could have important implications for audits and the audit profession. At the same time, it is largely a disclosure standard, rather than an audit performance standard that directs auditors to perform their work differently. There are some important areas in which existing audit performance standards need to be updated in order to ensure that auditors are doing enough work to be able to provide appropriate assurance on what are becoming increasingly complex financial statements. One of these areas is fair value and estimates, where we need to address both the audit procedures that an auditor should perform as well as the degree of supervision an auditor should exercise over a specialist engaged by the auditor to assist in evaluating fair values or estimates. We currently have projects on our standard setting agenda for both estimates, including fair value, and supervision of specialists, so I am hopeful that you will hear more about this important area from the Board in the next twelve months.
Another audit area that we will need to turn to in the near future, although it is not yet on our standard setting agenda, is auditing revenue. Revenue is probably the most important number on the financial statements for most investors, and it is one in which our inspectors frequently find problems. Revenue recognition also is a complex accounting area. The Financial Accounting Standards Board and the International Accounting Standards Board are working on a joint project to issue updated standards that will fundamentally change the basis for revenue recognition. We are monitoring the development of these new accounting standards. It is my hope that the PCAOB will soon devote substantial resources to an audit standard project in this area, and that we will be able to issue a proposal on auditing revenue with sufficient lead time to allow new accounting and auditing standards to become effective at or around the same time.
Let me close by thanking you all for your commitment to the accounting profession. To the alumni who are active in accounting, particularly those in public accounting and auditing, I hope that my comments today remind you of the importance of your work. To those of you serving on audit committees or working closely with them, please let us know what we can do to help. To the academics among you, thank you for so ably teaching the accountants of tomorrow. And to the students, I hope that many of you will give auditing serious consideration as a career choice.
The auditing profession faces many challenges, including keeping investor interests first, attracting and retaining talent, the need to perform high quality audits, and providing appropriate work-life balance. I am directly asking firm leaders what they are doing to ensure their audit teams have the resources to perform a quality audit. An overworked and exhausted audit staff, manager or partner cannot perform the job investors and audit committees expect. As we approach the end of the year and face the most intensive audit period in the early months of the new year, I encourage everyone in this room, as well as firm leaders and audit committees to carefully monitor auditors' workloads, to keep in mind that audit quality will decrease if staff is forced to work excessive hours, and to adopt an attitude of "not on my watch" with regard to that possibility.
With that, thank you again for listening, and I am happy to take any questions that you may have.
 See Auditing Standard No. 16, Communications with Audit Committees; Related Amendments to PCAOB Standards; and Transitional Amendments to AU SEC. 380, PCAOB Release No. 2012-004, PCAOB Rulemaking Docket Matter No. 030 (August 15, 2012).
 See Information for Audit Committees about the PCAOB Inspection Process, PCAOB Release No. 2012-003 (August 1, 2012).